Is the Target Date Fund Train Losing Steam?
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Thursday, July 22, 2010

Is the Target Date Fund Train Losing Steam?

As the markets swooned last quarter, target date funds fared slightly worse than usual. That's one of the findings in Ibbotson Associates' target maturity fund (i.e. target date fund) industry report for the second quarter of 2010.

According to the Morningstar subsidiary, target date fund attracted o$2.6 billion in flows in May and $2.1 billion in June. Compared to the pain equity markets and equity funds suffered at the same time, such flows seem strong, yet Ibbotson notes that monthly target date flows have averaged $3.9 billion over the last three years. Target date funds have gained significant popularity inside of retirement plans like 401(k)s, where they're intended for use as a kind of "fire and forget" type of investment option for retirement plan participants who may never manually reallocate their investments within the plan.

"The rapid and broad-based changes in flows from quarter-to-quarter suggest that defined contribution investors are not autopoilot when it comes to setting their contributions and leaving them unaltered regardless of market conditions," write the report's authors (Ibboston research director and chief investment officer Tom Idzorek and senior consultant Jeremy Stempien). "May's 'Flash Crash' has elicited elicited similar such skittish behavior in funds that are used more frequently in taxable accounts, so perhaps it shouldn't be surprising that investors are using similar discretion in monthly contributions in tax-deferred accounts."

The report also discusses target date funds' returns.

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